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Collinson: Troy’s Francis Brooke on shunning the index

In the decade since launching the Trojan Income fund, Francis Brooke has joined that rarefied group of income managers who have consistently outperformed. The fund’s approach scorns benchmarks and embraces “very plain vanilla” investing.

One of the great risks in financial journalism is to be too ebullient about a company or fund’s prospects. Adviser recommendations remain, on the whole, a private affair; journalists’ ones are very public, and with the ease of internet searches, are there to be viewed – and mocked – for ever.

But after lavishing praise on Troy Asset Management in both Fund Strategy and The Guardian almost precisely 10 years ago, my main regret is that I didn’t follow my own advice and pour lots of money in.

Since launching Trojan Income in September 2004, Francis Brooke has joined that rarefied group of income managers who have consistently outperformed – a league that includes Neil Woodford and Clive Beagles.

Over 10 years the fund is ranked 11th out of 63 (where four of those above him are Woodford-related), while over five years it is top quartile and over one year it is fifth out of 86. What’s more, it comes top of the 10-year tables for actually losing the least for investors over any time period. The maximum drawdown for Trojan Income is 22 per cent, against 31 per cent for Woodford.

What Brooke shares with the other top-performing managers is a near-complete disrespect for benchmarks. When Troy was first established by Sebastian Lyon in 2000 (Brooke joined in 2004 to launch the Income fund), it was seeded with £36m from then GEC supremo Lord Weinstock with a brief to look after the money conservatively, minimising downside but nonetheless obtaining decent long-term capital returns.

When I interviewed the duo in 2005 they were almost venomous about the rest of the industry’s obsession with benchmarks, which they condemned as driven by commercial risk.

The pair have stuck to their brief and for their lucky early investors have more than delivered on their promises. But Brooke says that in the early years it was a tough job getting noticed. The £18m in the fund had become just £50m five years later. “It was like trying to light a wet bonfire,” says Brooke.

But, boy, did it then burn brightly. Today it has £2.1bn in assets, and although in 2011 it soft closed, it is actually available for investment on major platforms such as Hargreaves Lansdown, starting at £100.

Right now, though, Brooke is concerned about the strength of equity markets. “We are pretty cautious at the moment. Last year the fund made 10 per cent when the market was up 1.5 per cent because we missed out on the pullback in midcap equities.

“It is always a difficult time for us when the market is euphoric and bullish. I worry about whether firms are over-distributing and if dividends will come under pressure.”

The income on the fund is currently around 3.8 per cent, which is not bad considering it was 4.1 per cent at launch a decade ago, during which time we have had a financial crisis and a collapse in interest rates.

Brooke keeps the portfolio small – just 43 stocks – and the turnover low, at 20 per cent to 30 per cent a year. He still firmly believes that even for what is a large cap fund, you have to make stock decisions without reference to the index.

“The growth of passive investing means active investors have to prove their case – or get found out. You have to avoid the herd at the point of maximum pain if you want to recoup the benefits.”

Markets are issuing warning signals, he says. “We are at a difficult point of the cycle. We have had five years of economic recovery, QE, and unnaturally low bond yields. The great challenge is the normalisation of interest rates. It is going to happen, although when and what the impact will be is another question.”

Consumer goods, utilities and financials make up about 55 per cent of the fund, though financials doesn’t mean the banks but the likes of Provident Financial and Rathbones.

Out of the miners for some time, he shows little interest in returning. “The pressure on their dividends is intense. I also don’t like to commit capital to areas where companies can have so little control over outcomes.”

Brooke has held some stocks almost since the fund’s inception. He bought Unilever first in 2005 when it was £4.89. Today it’s around £28. “It has tremendous brands, pricing power and emerging market exposure,” says Brooke, noting that the portfolio overall has only a limited exposure to domestic UK earnings.

He has avoided fancy financial instruments, having no interest in long-short investing. “We are actually very plain vanilla,” he says.

Royal Mail is a recent acquisition, trading mostly sideways this year, between 410p and 450p. It has been paid for in part by the sale of the fund’s holdings in AB Foods and Greggs. “They had just become too expensive.”

The Greggs share price graph is quite extraordinary – up from 580p six months ago to around 980p in recent days. But among high street outlets, Brooke is holding on to WH Smith. “People are constantly telling me to sell.” Despite WH Smith being one of the most shorted stocks in the FTSE, it has jumped by 30 per cent since last October.

What about shares in Troy itself? After a hugely successful decade in which Troy has accumulated £6bn in assets under management, is Brooke interested in cashing in? Along with Sebastian Lyon he holds about half the company. The Weinstocks hold the rest. But Brooke insists there are no plans for an IPO or a trade sale. “We don’t want to be the next Jupiter or Neptune,” he says, suggesting that another decade running equity income funds will suit him just fine.

Francis Brooke, Investment director, Trojan Income fund

Before joining Troy in 2004, Brooke was a director at Merrill Lynch Investment Managers, where he was responsible for over £1bn of UK equities.
He was also a member of Merrill’s asset allocation and sector strategy committees. Brooke was previously
employed at Foreign & Colonial Management, where he was appointed director in 1995, and at Kleinwort Benson Securities, where he began his career in 1986 after graduating from Edinburgh University.

Key takeaway

Not being beholden to benchmarks has led to healthy performance and huge inflows for Troy Asset Management’s Trojan Income Fund over the past decade. The team is approaching the current market with caution and is sticking to plain vanilla investing, but has no plans to sell out.

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